The Economic Way of Thinking - Bethel Social...
Transcript of The Economic Way of Thinking - Bethel Social...
THE ECONOMIC WAY OF THINKING
CHAPTER 1: THE ECONOMIC WAY OF THINKING
• KEY CONCEPT
• Scarcity is the situation that exists because wants are unlimited and resources are limited.
• WHY THE CONCEPT MATTERS
• The concept of scarcity is an issue you confront in everyday life. Suppose you have $20 to cover the cost of lunches for the week. How would you use the money to cover your wants Monday through Friday? How would buying a late afternoon snack for $1 on two of the days affect your lunch choices?
WHAT IS SCARCITY?• KEY CONCEPTS
• Wants — desires that can be met by consuming products
• Needs — things necessary for survival
• Scarcity — lack of resources available to meet all human wants
• not a temporary shortage
• Economics — study of how people use resources to satisfy wants
• examines how individuals and societies choose to use resources
• organizes, analyzes, interprets data about economic behaviors
• develops theories, economic laws to explain economy, predict future
Scarcity: The Basic Economic
Problem
WHAT IS SCARCITY?
• Principle 1: People Have Wants
• People make choices about all their needs and wants
• Wants are unlimited, ever changing
WHAT IS SCARCITY?
• Principle 2: Scarcity Affects Everyone
• Scarcity affects which goods and services are provided
• Goods — physical objects that can be bought
• Services — work one person does for another for pay
• Consumer — person who buys good or service for personal use
• Producer — person who makes a good or provides a service
SCARCITY LEADS TO THREE ECONOMIC QUESTIONS
• KEY CONCEPTS
• Scarcity affects society and producers as well as individuals
• Society must answer three basic economic questions:
• what will be produced?
• how will it be produced?
• for whom will it be produced?
SCARCITY LEADS TO THREE ECONOMIC QUESTIONS
• Question 1: What Will Be Produced?
• Societies must decide on mix of goods to produce
• depends in part on their natural resources
• Some countries allow producers and consumers to decide
• In other countries, governments decide
• Must also decide how much to produce; choice depends on societies’ wants
SCARCITY LEADS TO THREE ECONOMIC QUESTIONS
• Question 2: How Will It Be Produced?
• Decisions on production methods involve using resources efficiently
• decisions influenced by a society’s natural resources
• Societies adopt different approaches
• with unskilled labor force, might use labor-intensive methods
• with skilled labor force, might use capital-intensive methods
SCARCITY LEADS TO THREE ECONOMIC QUESTIONS
• Question 3: For Whom Will It Be Produced?
• How goods and services are distributed involves two questions
• how should each person’s share be determined?
• how will goods and services be delivered to people?
THE FACTORS OF PRODUCTION
• KEY CONCEPTS
• Factors of production — resources needed to produce goods and services
• include land, labor, capital, entrepreneurship
• supply is limited
THE FACTORS OF PRODUCTION
• Factor 1: Land
• Land means all natural resources on or under the ground
• includes water, forests, wildlife, mineral deposits
THE FACTORS OF PRODUCTION
• Factor 2: Labor
• Labor is all the human time, effort, talent used to make products
• physical and mental effort used to make a good or provide a service
THE FACTORS OF PRODUCTION
• Factor 3: Capital
• Capital is a producer’s physical resources
• includes tools, machines, offices, stores, roads, vehicles
• sometimes called physical capital or real capital
• Workers invest in human capital — knowledge and skills
• workers with more human capital are more productive
THE FACTORS OF PRODUCTION
• Factor 4: Entrepreneurship
• Entrepreneurship — vision, skill, ingenuity, willingness to take risks
• Entrepreneurs anticipate consumer wants, satisfy these in new ways
• develop new products, methods of production, marketing or distributing
• risk time, energy, creativity, money to make a profit
REVIEWING KEY CONCEPTS
• Explain the relationship between the terms in each of these pairs:
• wants and scarcity
• consumer and producer
• factors of production and entrepreneurship
MAKING CHOICES• KEY CONCEPTS
• Economic choices shaped by
• Incentives — benefits that encourage people to act in certain ways
• Utility — benefit or satisfaction gained from using a good or service
• To make choices, people economize:
• make decisions according to best combination of costs and benefits
Economic Choice Today:
Opportunity Cost
MAKING CHOICES
• Factor 1: Motivations for Choice
• People motivated by incentives, expected utility, desire to economize
• They weigh costs against benefits to make purposeful choices
• motivated by self-interest: look for ways to maximize utility
MAKING CHOICES
• Factor 2: No Free Lunch
• All choices have a cost
• choosing one thing means giving up another, or paying a cost
• cost can take form of money, time, other thing of value
TRADE-OFFS AND OPPORTUNITY COST
• KEY CONCEPTS
• Trade-off is alternative people give up when they make a choice
• usually means giving up some, not all, of a thing to get more of another
TRADE-OFFS AND OPPORTUNITY COST
• Example 1: Making Trade-Offs
• Shanti wants to earn college credit over summer
• semester-long university course offers more credits
• six-week high school course leaves time for vacation
TRADE-OFFS AND OPPORTUNITY COST
• Example 2: Counting the Opportunity Cost
• Opportunity cost is value of next-best alternative a person gives up
• not the value of all possible alternatives
• Dan chooses to work for six months so he can travel for six months
• opportunity cost: six months of salary
ANALYZING CHOICES
• KEY CONCEPTS
• Cost-benefit analysis — examination of costs, expected benefits of choices
• one of most useful tools for evaluating relative worth of economic choices
ANALYZING CHOICES
• Example: Max’s Decision-Making Grid
• Decision-making grid shows what one gets, gives up with each choice
• Max’s grid shows all possible choices for his free hours each week
• lists choices, benefits and opportunity cost of each choice
• With time, costs and benefits change; also goals and circumstances
• Changes influence decisions, make people alter original choices
ANALYZING CHOICES
• Example: Marginal Costs and Benefits
• Marginal cost
• additional cost of using one more unit of a good or service
• Marginal benefit
• additional benefit of using one more unit of a good or service
REVIEWING KEY CONCEPTS
• Explain the relationship between the terms in each of these pairs:
• incentive and utility
• trade-off and opportunity cost
• marginal cost and marginal benefit
GRAPHING THE POSSIBILITIES• KEY CONCEPTS
• Economic models — simplified representations of economic forces
• Production possibilities curve (PPC) is one model
• maximum goods or services that can be produced from limited resources
• also called production possibilities frontier
Analyzing Production Possibilities
GRAPHING THE POSSIBILITIES
• KEY CONCEPTS
• PPC based on assumptions that simplify economic interactions
• resources are fixed
• all resources are fully employed
• only two things can be produced
• technology is fixed
GRAPHING THE POSSIBILITIES
• Production Possibilities Curve
• PPC runs between extremes of producing only one item or the other
• Data is plotted on a graph; lines joining points is PPC
• shows maximum number of one item relative to other item
• PPC shows opportunity cost of each choice
• more of one product means less of the other
WHAT WE LEARN FROM PPCS
• KEY CONCEPTS
• Concepts revealed by PPC:
• Efficiency — producing the maximum amount of goods and services possible
• Underutilization — producing fewer goods and services than possible
WHAT WE LEARN FROM PPCS
• Example: Efficiency and Underutilization
• Each point on PPC represents efficiency
• points inside curve mean underutilization; outside curve cannot be met
• Law of increasing opportunity costs
• as production switches from one product to another, more resources needed to increase production of second product
WHAT WE LEARN FROM PPCS
• Example: Increasing Opportunity Costs
• Increase in opportunity cost — each new unit costs more than last one
• Reasons for increasing cost of making more of one product
• need new resources, machines, factories
• must retrain workers
• Costs paid by making less and less of other product
CHANGING PRODUCTION POSSIBILITIES
• Example: A Shift in the PPC
• A country’s supply of resources changes over time
• Example: U.S. in 1800s grew, gained resources, workers, new technology
• new resources mean new production possibilities beyond frontier
• Increased production shown on PPC as shift of curve outward
• Increase in total output called economic growth
REVIEWING KEY CONCEPTS
• Explain how each term is illustrated by the production possibilities curve:
• underutilization
• efficiency
WORKING WITH DATA• KEY CONCEPTS
• Statistics — numerical data or information
• show patterns of human behavior
• Economic models help organize and interpret data
The Economists Toolbox
WORKING WITH DATA
• Using Economic Models
• Economic models focus on a limited number of variables
• thus based on assumptions and use simplification
• expressed in words, graphs, equations
WORKING WITH DATA
• Using Charts and Tables
• Economists look for statistical relationships, trends, connections
• Charts and tables display data in rows and columns
• can reveal patterns by showing numbers in relation to other numbers
WORKING WITH DATA
• Using Graphs
• Graphs use two sets of variables: along horizontal, vertical axes
• Line graphs useful for showing changes over time
• in economics, line referred to as a curve, even if straight
• Bar graphs good for showing comparisons
• Pie graph (or pie chart, circle graph) shows numbers in relation to whole
MICROECONOMICS AND MACROECONOMICS
• KEY CONCEPTS
• Microeconomics — studies behavior of individual players in an economy
• includes individuals, families, businesses
• Macroeconomics — studies behavior of economy as a whole
• topics include inflation, unemployment, aggregate demand and aggregate supply
MICROECONOMICS AND MACROECONOMICS
• Microeconomics
• Microeconomics examines specific, individual elements in an economy
• prices, costs, profits, competition, consumer and producer behavior
• Some Topics of Interest: business organization, labor markets, environmental issues
MICROECONOMICS AND MACROECONOMICS
• Macroeconomics
• Macroeconomics studies sectors — combination of all individual units
• Includes consumer, business, public or government sectors
• Macroeconomics studies national or global topics:
• monetary system, business cycle, tax policies, international trade
POSITIVE ECONOMICS AND NORMATIVE ECONOMICS
• KEY CONCEPTS
• Positive economics describes and explains economic behavior as it is
• uses verifiable facts; does not make judgments
• Normative economics studies what economic behavior should be
• makes value judgments to recommend future actions
POSITIVE ECONOMICS AND NORMATIVE ECONOMICS
• Positive Economics
• Positive economics uses scientific method
• observe data, hypothesize, test, refine, continue testing
• Statements tested against real-world data
• proved (or strongly supported) or disproved (or strongly questioned)
POSITIVE ECONOMICS AND NORMATIVE ECONOMICS
• Normative Economics
• Normative economics studies facts, asks if course of action is good
• Recommendations differ because values they are based on also differ
ADAM SMITH: FOUNDER OF MODERN ECONOMICS
• Seeing the Invisible
• An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
• challenged mercantilism; argued for free trade
• Invisible hand guides free marketplace, benefits sellers and buyers
• people pursue own economic self-interest
• producers sell at prices that satisfy them and that consumers will pay
REVIEWING KEY CONCEPTS
• Explain the differences between the terms in each of these pairs:
• statistics and economic model
• macroeconomics and microeconomics
• positive economics and normative economics
CASE STUDY: THE REAL COST OF EXPANDING O’HARE
AIRPORT• Background
• Chicago’s O’Hare Airport is one of the busiest airports in the United States.
• Delays at O’Hare are commonplace.
• Considerable debate over the best solution to improve efficiency.
• What’s the Issue
• What are the real costs involved in airport expansion? Study these sources to determine the costs tied to the expansion of O’Hare airport.
CASE STUDY: THE REAL COST OF EXPANDING O’HARE AIRPORT
{CONTINUED}
• Thinking Economically
1.Explain the real cost of expanding O’Hare Airport. Use information presented in the documents to support your answer.
2.Who are the most likely winners and losers as a result of the O’Hare expansion? Explain your answer.
3.How might supporters of expansion use a production possibilities model to strengthen their case?